Of Mutual Interest: Expense ratios in 401(k) plans continue to fall

TIM PARADIS

Published 10:00 pm, Friday, September 28, 2007

While the array of 401(k) choices can seem daunting at first, many workers appear to be seeing one thing clearly: The value of lower expenses.

The asset-weighted expense ratios for stock mutual funds in 401(k) plans fell to 0.74 percent in 2006 compared with 0.76 percent the year before, according to new findings from the Investment Company Institute, the mutual fund trade group. The asset- weighted figure, which reflects where investors put most of their money, compares well with the simple average for stock funds, which is 1.5 percent.

About half of the $2.7 trillion invested in 401(k) plans at the end of last year was put in mutual funds. Of the 50 million participants in 401(k) plans, many of those investing in mutual funds tend to put money into low-cost funds with below-average turnover.

"The 401(k) space is a highly competitive space, so you've got not only a whole bunch of mutual funds competing to be in the lineup but a whole bunch of other products," said Sarah Holden of the Investment Company Institute, a co-author of the report.

Mutual funds have faced competition not only other mutual fund providers -- driving down fees on actively managed funds as well as on index funds -- but also from newer types of investments such as exchange traded funds. That is a security that tracks an underlying benchmark much like an index mutual fund but trades like a stock on an exchange. It can therefore be bought and sold during the trading day.

Holden contends that while many forces are at work, employers are becoming better at extracting more from the companies that they hire to oversee their 401(k) plans. Big companies, for example, can promise access to a large employee base if an administrator lowers its oversight fees.

While an employer and its workers typically share the costs involved in administering the 401(k) plan, it's in the interest of both sides to keep these costs down. Companies with competitive 401(k) plans can find it easier to attract and retain talented workers.

"The employers are very actively monitoring and keeping track of the performance that they have in their plan," Holden said.

Workers' attention to fees has increased in recent years. Another institute study found that for the first time, more workers were first considering fees rather than an investment's track record when deciding where to invest.

Holden said it is best if investors consider many factors when deciding where to put their money.

"I think it's important that people don't lose sight of their investing goal and don't only focus on fees," she said.

Savvy investors are searching not only for low-cost investments but, in the case of funds, are looking for those with low portfolio turnover, which helps hold down expenses. Other expenses can include overhead and research.

Increased interest in what are known as life cycle or target-date funds is perhaps helping investors ignore urges to shift their money in and out of funds when the markets gyrate. Investors in these funds estimate when they plan to retire and are placed in a fund that automatically shifts investments toward more conservative confines as the retirement year draws near.

These funds cater to investors who want to avoid having to make periodic decisions about when and how to shift their investments. And by knowing that their investments will automatically become more conservative, investors can perhaps find it easier to ignore upheavals on Wall Street.